COMMISSIONER OF INCOME-TAX VS E.I.D. PARRY (INDIA) LTD.
1999 P T D 3441
[230 I T R 70]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
E.I.D. PARRY (INDIA) LTD.
Tax Cases Nos.1074 and 1075 of 1983 (References Nos.532 and 523 of 1983), decided on 07/11/1996.
Income-tax---
-----Reassessment---Information that income had escaped assessment---Audit note pointing out the legal position to be followed by Income-tax Officer would not constitute information under S.147(b)---Reassessment based on such audit note is not valid---Indian Income Tax Act, 1961, S.147(b).
The opinion of an internal audit party of the Income-tax Department on a point of law cannot be regarded as "information" within the meaning of section 14'7(b) of the Income Tax Act, 1961, for the purpose of reopening an assessment. But although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the Income-tax Officer to it. Law is one thing, and its communication- another. If the pointing out by the Revenue audit party is only with regard to omission of facts made by the assessee while making the original assessment, that would be permissible, as constituting information for reopening the assessment under section 147(b). If the Revenue audit party points out the law and the legal position to be followed by the Income-tax Officer in the reassessment proceedings, then that would not constitute information under section 147(b).
In view of the pronouncement of the decision in Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) the decision in R.K. Malhotra, ITO v. Kasturbhai Lalbhai (1.977) 109 ITR 537 (SC) would no longer be good law:
Held, on the facts, that a plain reading of the Revenue audit party notes would show that it directed the Income-tax Officer to assess the value of perquisites and amenities provided by the company to its directors/employees under section 40(a)(v) instead of under section 40(c)(iii). This was definitely pointing out the law to the Income-tax Officer to be followed in the reassessment proceedings. So also, while considering the expenses of the soda ash project, the audit party pointed :out that the deductions allowed for Rs.1,45,948 and Rs.45,802 were in the nature of preliminary expenses and, therefore, according to the audit party, these expenses should not be allowed. The reassessment made in pursuance of the audit note was not valid. The Tribunal was correct in setting aside the order of reassessment and in not disposing of the appeal on the merits.
Malhotra (R.K.), ITO v. Kasturbhai Lalbhai (1977) 109 ITR 537 (SC) and Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) ref.
C. V. Rajan for the Commissioner.
Aravind Pandian for the Assessee.
JUDGMENT
K.A. THANIKKACHALAM, J.---Pursuant to the directions, dated April 20, 1982, of this Court in T.C. Nos.370 and 371 of 1981, the Tribunal referred the following two questions for opinion of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"):
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reassessment was invalid?
(2) Whether the Appellate Tribunal is justified in not proceeding to enter into the merits of the reassessment?"
For the assessment year 1968-69, the original assessment was made on February 29, 1972. Later, on the basis of the information available from the audit that excessive relief was granted to the assessee in respect of soda ash project, that the income under section 41(1) was under-assessed and that the disallowance under section 40(c)(iii) was not correctly computed, the assessment was reopened under section 147(b) of the Act. The Income-tax Officer passed the reassessment order on March 30, 1974, adding the following:---
| | | (Rs. ) |
| (1) | Disallowance in respect of Soda Ash Project | 1,45,948 |
| (2) | Further deemed income under- section 41(1) | 16,99.967 |
| (3) | Further disallowance under section 40(c)(iii) | 34,185. |
On appeal, the Appellate Assistant Commissioner overruled the assessee's contention that the reassessment based upon the audit report was invalid on the basis of the decision of the Supreme Court in R.K. Malhotra, I.T.O. v. Kasturbhai Lalbhai (1977) 109 ITR 537. The Appellate Assistant Commissioner deleted the addition of Rs.1,45,948 for the reasons mentioned in paragraph 3 of his order. He also deleted the other addition of Rs.16,99,967 for the reasons mentioned in paragraphs 7 to 12 of his order. As regards the disallowance of Rs.34,185 under section 40(c)(iii) of the Act,, the Appellate Assistant Commissioner directed the Income-tax Officer to rework the disallowance to be made on the lines suggested by him in paragraphs 16 to 18 of his order. Before the Appellate Assistant Commissioner, the Income-tax Officer had requested for enhancement of the assessment for some more disallowance under section 40(c)(iii) of the Act The Appellate Assistant Commissioner went into that question and held that a sum of Rs.1,42,659 has to be disallowed under section 37(3) and it was not done in the original assessment. He also held that another sum of Rs.9,423 also should be disallowed under section 37(3). The Appellate Assistant Commissioner, thus directed disallowance of Rs.1,52,082 on the enhancement request made by the Income-tax Officer.
??????????? On appeal before the Tribunal, the assessee challenged the legality of the reassessment and also questioned the enhancement of assessment made by the Appellate Assistant Commissioner at the request made by the Income? tax Officer-, whereas the Revenue contested the deletions and disallowances set aside by the Appellate Assistant Commissioner. The Tribunal, after bearing the parties, considering the Revenue audit note in the light of the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, held that the information furnished by the internal audit party is leading to pointing out a question of law. Therefore, the Tribunal came to the conclusion that the reassessment under section 147(b) of the Act is bad in law. Accordingly, the reassessment made by the Income-tax Officer under section 147(b) of the Act was set aside and the original assessment order passed by the Income-tax Officer was restored. In the result, the Tribunal did not deal with the appeals on the merits.
Before us, learned standing counsel for the Department submitted that a plain reading of the Revenue audit report would go to show that the audit party pointed out only the facts which were got considered by the Income-tax Officer. There is no mention of any legal point, 'which was omitted to be considered by the, Income-tax Officer. According to learned standing counsel, pointing out that the expenses involved in the new unit for production of soda ash and ammonium chloride would amount to primary expenses, not liable as deduction, would not amount to pointing out any law. Therefore, according to learned standing counsel, reopening was done on the basis of the audit note relating to omission of facts done by the Income-tax Officer.
We have heard learned standing counsel appearing for the Department and perused the records carefully. The Tribunal has extracted the opinion expressed by the Revenue audit report. The Revenue audit objection is common to the assessee as well as the other companies. The remarks made in the case of Buckingham and Carnatic Co. Ltd., Madras, in respect of the assessments for 1968-69 and 1969-70 as under are made applicable to the assessee in the present case for the assessment year under?????????????????? consideration:
"Buckingham and Carnatic Co. Ltd., Madras Company CT. No. A-B of 1968-69 and 1969-70. Total income: Rs.6,71,410 and loss Rs.4,13,070, dates of assessment January 21, 1972., and January 31, 1972. In computing the business income of the company for the assessment years 1968-69 and 1969-70 the value of perquisites and amenities provided by the company to its directors/employees to the extent it exceeds one-fifth of their salary, has been disallowed and ITD added to the income returned, as required under section 40(a)(v) of the Income-tax Act. It is seen from the statement prepared by the assessee and accepted by the Income-tax Officer for this purpose that evaluating the perquisites/amenities by way of provision of accommodation, car, servants, etc., the value as computed and adopted for the individual assessment of the respective directors/employees has been adopted. This is not in accordance with the provisions of section 40(a)(v), what is to be reckoned for purposes of section 40(a)(v) is the expenditure actually incurred by the employer in providing the perquisites/amenities and not their notional value adopted in the individual assessment of the directors/employers."
Another Revenue audit objection, dated October 16, 1972, related to alleged under assessment of business income arising from grant of deduction for preliminary expenses not admissible is as under:
"E.I.D. Parry Ltd., Madras company/G.I. No. 17-E of 1968-69 and 1969-70 total income Rs. 1,75,05,620, date of assessment February 29, 1972, and in computing its business income for the assessment years 1968-69 and 1969-70, the company has claimed and has been allowed deduction for Rs. 1,45,948 and Rs.45,802 respectively, denoted as 'soda ash project expenses'. As the company's existing business does not include manufacture of soda ash, the 'project expenses' mentioned above would be in the nature of preliminary expenses not admissible for deduction in computing the business income of the company. The correctness of the deduction allowed for the two sums as, above, requires to be examined. If the two assessments are revised to disallow the preliminary expenses there will be further tax due from the company to the extent of Rs. 1,05,450.
These are all Revenue audit notes, on the basis of which, the assessment was completed for the assessment years under consideration, under section 147(b) of the Act. According to learned standing counsel for the Department, the above audit notes do not relate to any matter of law, but only relate to a matter of fact. The Revenue audit party has pointed out ' the various figures furnished by the assessee, which were omitted to be considered by the Income-tax Officer. Therefore, according to learned standing counsel, the Revenue audit would not be governed by the latest ruling of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996. However, the Tribunal pointed out that 4 Plain reading of the Revenue audit notes would go to show that the Income-?tax Officer was directed to assess the income returned by the assessee under VUi04s heads in accordance with the provisions of law mentioned in the report. Therefore, according to the Tribunal, the Revenue audit reports would definitely go to show that the audit party has pointed out the law to be applied by the Income-tax Officer, while making the reassessment.
We have also seen the Revenue audit reports. Even according to us, a plain reading of the above Revenue audit notes would go to show that directing the Income-tax Officer to assess the value of perquisites and amenities provided by the company to its directors/employees under section 40(a)(v) of the Act instead of under section 40(c)(iii) of the Act is definitely pointing out the law to the Income-tax Officer to be followed in the reassessment proceedings. So also, while considering the soda ash project expenses, the audit party pointed out that the deduction allowed for Rs.1,45,948 and Rs.45,802 are in the nature of preliminary expenses and therefore, according to the audit party, these expenses should not be allowed. According to the audit party, if all those disallowances are made, the extent of the tax payable by the assessee would get enhanced.
If the pointing out by. the Revenue audit party is only with regard to omission of facts made by the assessee while making the original assessment, that would be permissible, as constituting information for reopening the assessment under section 147(b) of the Act. If the Revenue audit party points out the law and the legal position to be followed by the Income-tax Officer in the reassessment proceedings, then that would not constitute information under section 147(b) of the Act. The Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, has held as follows (headnote):
"The opinion of an internal audit party of the Income-tax Department on a point of law cannot be regarded as 'information' within the meaning of section ~147(b) of the Income Tax Act, 1961, for the purpose of reopening an assessment. But although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the Income-tax Officer to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying section 147(b) may be avoided." '
In view of the pronouncement of the decision in Indian and Eastern Newspaper Society Ltd v. CIT (1979) 119 ITR 996 (SC), the decision in R.K. Malhotra, ITO v. Kasturbhai Lalbhai (1977) 109 ITR 537 (SC), would no longer be good law.. Thus, considering the facts arising in this case in the light of the decision of the Supreme Court cited supra, we hold that the Tribunal was correct in setting aside the reassessment made in pursuance of the audit note and restoring the original assessment made by the Income-tax Officer. The Tribunal was also correct in not disposing of the appeal in the
??????????? In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.
M.B.A./3103/FC ??????????????????????????????????????????????????????????????????? Reference answered.